One subject you can get rare agreement on in the world of ESG is the inconsistency in results and power wielded by ESG rating agencies. This has not gone unnoticed by the regulators as one of the potential enablers of greenwashing.
ESG data and service providers make up a key component in the investment allocation process. To satisfy investors’ needs for ESG data and analysis, the soundness of these services is essential. While their influence is growing, these providers remain more or less unregulated.
Given the diversity of methodologies used for ESG ratings, greater transparency as to the source of data is necessary. A regulatory framework is also required to reduce the misallocation of investments due to greenwashing.
India is one of first countries where its regulatory agency, Securities and Exchange Board of India (SEBI), has stepped up and issued a consultation paper published January 22th of this year to discuss with the industry how to go about regulating the ESG rating agencies. They argue that there is an “imperative need” to ensure that ESG ratings providers operate in a transparent and regulated environment, in order to reduce the risks in the market. According to the paper, ESG rating agencies will need to apply for SEBI’s recognition every two years. In case any non-compliances are found, the regulator can intervene at any time.
CFA Institute
Former President & CEO
Sustainability Researcher
Chartwell Capital
Research Associate, Sustain Finance
